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Cashing in on the crisis

5 min read
http://www.afr.com/wealth/personal-finance/cashing-in-on-the-crisis-20191128-p53exu

Fund manager Nathan Parkin, who was formerly deputy head of equities at Perpetual and is now investment director at Ethical Partners, is not convinced the damage will just be in the short term.

“The shocking nature of the allegations, and especially the exploitation element, does affect the brand long term and could affect the flow of business in mortgages and deposits,” says Parkin, who has been reducing his fund’s already underweight exposure to Westpac in the days since the crisis began.

“That could make the difference financially … there is more risk attached to the stock because of it.”

Operating table opportunity

While there may be additional risk attached to Westpac’s brand, particularly over the short or medium time horizon, some experts think that means a rare opportunity for investors to get a blue chip stock on the cheap.

Wilson Asset Management lead portfolio manager Matt Haupt believes brave investors could seize particular opportunity over an ultra short-term horizon.

“Buy for about a week, then sell after a week,” Haupt told shareholders at an event in Adelaide on Wednesday.

Scott Phillips, chief investment officer at The Motley Fool, says he is not a “sell in one week kind of guy”, but the idea that there is opportunity in crisis has some serious merit.

If you are buying individual stocks,it should be because you believe they can outperform the market, otherwise just buy an index-tracking ETF and go fishing, says Scott Phillip. 

“There’s a saying about buying great businesses when they’re on the operating table,” Phillips says. “Westpac is not quite on the operating table, but it’s currently the most unloved and ickiest stock to hold right now – that’s an opportunity.”

While it is unlikely to be a “market thrashing” advantage, Phillips said it’s a sound strategy to buy whichever of the big four banks has the lowest relative valuation, given the long-term attractiveness they all have because of their sheer market power.

“If you’re trying to pick the best bank, the one that is the least favoured will generally be the best investment over time, because they all share the same underlying fundamentals.”

Once the knee-jerk reaction from the market fades and the company is no longer in the headlines, investors may start to realise that a stock in scandal can be quite the bargain.

Structural challenges

Underlying bank fundamentals face some serious headwinds in the current climate, not just for Westpac but across the big four.

Phillips says he is not a member of the “banking crash club” but that the banking sector does face some structural challenges.

Weak credit growth, low interest rates and higher regulatory compliance burdens and capital requirements are resulting in thinning profit margins and a more negative outlook for the sector from the perspective of investors.

“If you are buying individual stocks, then theoretically it should be because you believe they can outperform the market, otherwise just buy an index-tracking ETF and go fishing,” Phillips says.

“And I just don’t see how banks can be in the vanguard of market outperformance given the structural challenges they face.”

For Parkin, a bank’s ability to weather the storm of these structural challenges and its approach to risk management and compliance go hand in hand.

Investors need to look at a company’s “regulatory radar” and check how seriously it takes a crisis, as well as the real long-term changes it makes.

Looking at the big four banks, Parkin believes two stocks are out in front.

“ANZ and CommBank are ahead,” he says. We believe you can get a good yield out of ANZ and CommBank, and there’s less risk because they are further at working through regulatory issues and they have more capital, so they’re less likely to have to cut the dividend than the other two.”

He says the decisions taken by Commonwealth Bank in the wake of its AUSTRAC money-laundering scandal in 2017 have turned it into one of the more attractive investment options today.

Nathan Parkin suggests Suncorp as an alternative to the big four. Photo: Nic Walker

“They changed their management team, they changed their messaging and it seemed genuine,” Parkin says.

“Culture can change and we certainly think it has at some banks, and we’re hoping Westpac will be next.”

Keeping it clean

Some investors will be happy to look at the relative valuations, capital positions and approach to regulatory compliance and make a decision about which of the big four banks to back.

But for others, the Westpac scandal may be the straw that broke the camel’s back after a long string of issues uncovered at the Hayne royal commission and even before that.

For those looking for banking stock exposure outside the big four, especially those doing so for ethical reasons, there are some options.

Parkin suggests Suncorp as an alternative to the big four. “We think the management team is solid and changes have been made there,” he says. “There is reasonable upside and relatively little downside in that particular stock.”

For those concerned about money laundering and counter terrorism financing risks in particular – which were at the heart of the Westpac scandal – Phillips suggests that smaller may be better.

“All banks face risks, but if you want the most vanilla bank possible to avoid some of the more unusual or surprising stuff, then you’re looking for smaller, less complex businesses,” he says.

Parkin suggests regional banks like Bendigo and Adelaide Bank or Tasmania’s MyState may be ASX-listed options that fit this bill.

But at the same time he says that while it may be reasonable for an investor to refuse a big four bank stock on ethical grounds due to a regulatory matter, it is not necessarily rational.

“Avoiding banks on ethical grounds is short-sighted because, if anything, scandals are going to tighten up their approach to these issues,” he says.

“That is yesterday’s Westpac. I guarantee tomorrow’s Westpac won’t expose themselves to that in the next 10 years.”

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